This type of funding would be Inappropriate for a cuisines that needed to cover a short-term funding requirement while walling for a receivable to be paid. Cost What is the cost of the funding? The greater the risks taken by the providers of funding, the higher is the rate of return they require. For example, if a provider of funds is promised that it would be the first to be repaid if the business were in difficulty and that it can take a charge over the physical assets (such as property that it could sell to clear the debt), it has a low risk of losing its money and thus the cuisines would expect the cost of this funding to be relatively low.
However, lowering the risk to one provider of funds increases the risk to another. With the assets all used as security for one party, another will have no security that its money will be repaid in event of difficulty. For this higher risk a higher return will be required. The cost of funding is therefore determined by the level of risk to each type of funding. There are three main types of funding: Equity. This is capital put in by investors – the owners of business.
They are the last to be repaid if the business is in trouble and have to accept the risk that they may lose all the money they put into the business (but no more than that). In return they are entitled to the profits generated by the business, and to a potentially limitless return. ; Debt instruments. These long-term borrowings are typically used to fund Investments such as the purchase of property. The lenders will have priority If the business runs into trouble and may even have some protection by taking security on the asset funded.
Their reward will be a predetermined rate of Interest that Is either fixed or linked to a central bank Index. ; Bank borrowing. This typically short- term funding Is used to cover temporary shortfalls and telling differences. The borrowing may be unsecured and consequently carry an Interest rate above that of the debt instrument. A business may organize a borrowing facility with a bank to enable it to draw on this type of funding at short notice without the need for further discussion with the bank. Http://classify . Com/homework-help/business-management-homework-help
